Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The M&A Non-Solicit Trap That Cost a Buyer $30 Million
Transcript
- Lucas: You spend months negotiating an acquisition. You close the deal. And then your seller turns around and poaches your most important new employees — legally. That's the non-solicitation trap, and it's cost one buyer I tracked about $30 million on a $120 million deal. Luna: Wait — how does the seller poach after they've sold? They don't own the company anymore. Lucas: Right, they don't. But they still know everybody. And the non-solicit clause in the purchase agreement — the one the buyer thought protected them — actually backfired. Let me walk through the case. A mid-market software company, let's call it TargetCo, was acquired by a larger tech firm for $120 million in cash. TargetCo had about 80 employees, but the crown jewels were four senior engineers. The buyer's whole growth thesis depended on keeping them. Luna: So the buyer puts in a standard non-solicit — seller can't hire away TargetCo employees for, what, two years? Lucas: Exactly. A two-year non-solicit, mutual — meaning both buyer and seller are restricted. Standard language: neither party shall 'solicit, induce, or encourage' employees of the other to leave. But here's the trap. The buyer's lawyers drafted the clause with a typical carve-out: general solicitations not targeted at the other party are allowed. So job ads, LinkedIn posts, recruiter outreach to the public — that's fine. That carve-out is in almost every non-solicit. Luna: And the seller used that carve-out? They placed a general job ad that happened to reach the four engineers? Lucas: More creative than that. The seller — the former CEO — started a new company in a completely different vertical, six months after closing. He hired a third-party recruiter and told them: 'Find me senior cloud infrastructure engineers. Don't look at my old company's list — just use LinkedIn and general sourcing.' The recruiter naturally found four of the best people in that niche. They were the same four engineers. The recruiter reached out via LinkedIn InMail — a general solicitation. The engineers applied. They got offers. They left. Luna: And the buyer had no recourse because the recruiter didn't specifically target them. Lucas: Correct. The buyer sued, arguing the whole arrangement was a sham — the seller intentionally designed the process to circumvent the non-solicit. But the court looked at the language. The clause explicitly allowed general solicitations. The recruiter didn't have a list of TargetCo employees. The engineers applied on their own. The court said: 'The clause says what it says.' The buyer lost. They spent about two years and an estimated $8 million in legal fees and settlement talks. And the real cost — the revenue they lost from delayed product launches because they couldn't keep those engineers — they internally estimated at $30 million. Luna: So the carve-out that was supposed to protect normal hiring actually gave the seller a blueprint to poach. That's brutal. Lucas: And it's far more common than people think. Non-solicits are one of the most overlooked clauses in M&A because everyone focuses on non-competes. But non-competes are harder to enforce — many states, like California, basically won't touch them. Non-solicits are enforced more often, but they're also easier to get around if you draft them poorly. Luna: What's the fix? If you're a buyer, what language stops this? Lucas: Two things. First, remove the general-solicitation carve-out entirely. You want any hiring of a former employee — even via a public job ad — to be a violation if the employee was covered. Some sellers will push back because they want to be able to hire broadly, but if the seller is starting a new company in the same industry, that's a red flag. Second, add a 'notice and matching' clause: if a seller does want to hire a covered employee, they have to notify the buyer and give the buyer a chance to make a retention offer. That's a compromise that often gets accepted. Luna: And what about the seller's side? If I'm selling, do I want a broad non-solicit against me? Lucas: If you're the seller, you want it as narrow as possible. You want that general-solicitation carve-out. You want to exclude any employee who was terminated or who left voluntarily. And you want a limited list of key employees — not all 80 people. The seller in this case actually had a decent lawyer — they kept the carve-out, which gave them the loophole. So from a seller perspective, a well-drafted non-solicit gives you flexibility to start your next venture without being hamstrung. Luna: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Keeps us going without sponsors. Lucas: Yeah, and honestly, if these conversations have moved your work forward in some small way, that's exactly what that support enables. Just a thought. Luna: Alright. Back to the trap. Lucas, you mentioned courts enforce non-solicits more than non-competes. How much more? Lucas: Significantly. A 2023 study from the American Bar Association looked at about 400 M&A disputes over five years. Non-solicit clauses were enforced — at least partially — in about 70 percent of cases where they were challenged. Non-competes? Under 40 percent. Courts are much more comfortable restricting solicitation than restricting someone's right to work entirely. But the key is the drafting. If the clause is ambiguous, courts tend to interpret it against the drafter. If the buyer writes a sloppy carve-out, the seller gets the benefit. Luna: So the buyer in our case — they probably could have won if they'd removed that carve-out. Lucas: Almost certainly. And there's another layer. The buyer also failed to get 'key employee retention agreements' signed before closing. They assumed the non-solicit was enough. But a non-solicit is a restriction on the seller — it doesn't bind the employees themselves. If the engineers want to leave, they can. What you need is a separate retention bonus or a change of control agreement that gives them a financial incentive to stay. That's common in larger deals but often skipped in the mid-market. Luna: So the non-solicit is a backstop, not a solution. You need both. Lucas: Exactly. Think of it as a fence. The non-solicit is a fence that says the seller can't open the gate. But the employees can still climb over if they want. The retention bonus is the thing that makes them want to stay inside. Without both, you're exposed. Luna: Let's talk about another nuance. The non-solicit in this case was mutual — it also restricted the buyer from hiring the seller's future employees. Did that matter? Lucas: It mattered a lot. Because the buyer had a large HR department, and they regularly hired from the seller's new company — not intentionally, but because they were in similar talent pools. After the dispute started, the seller countersued for breach of the non-solicit, claiming the buyer had solicited three of their new hires. The buyer had to spend another year and a half proving those were general solicitations. It became a mess of cross-claims. The mutual non-solicit, which seemed fair at signing, turned into a weapon for both sides. Luna: So is the lesson that mutual non-solicits are a bad idea? Lucas: Not always. They can be fine if both parties are in completely different industries — then the risk is low. But if you're in overlapping talent markets, a mutual non-solicit is a ticking time bomb. Better to make it one-way: the seller can't solicit the buyer's covered employees, but the buyer is free to hire anyone from the seller's new venture. That asymmetry makes sense because the buyer just paid $120 million for the talent — they shouldn't have to worry about accidentally poaching from the seller's new startup. Luna: That seems like an easy negotiation win for the buyer. Why don't more buyers ask for that? Lucas: Because M&A lawyers often use templates. They pull a 'standard' non-solicit from a previous deal and tweak the names. They don't think about the specific talent dynamics. And sellers push back on one-way clauses, saying they're unfair. But if the buyer frames it as: 'We're paying for your team, and we need to protect that investment. You can hire anyone else in the world except these 20 people,' it's a reasonable request. Most sellers will accept if they understand the rationale. Luna: Are there any other common non-solicit traps you see? Lucas: Yes. The definition of 'solicit' is often too narrow. Some clauses say 'directly or indirectly solicit' but then define 'indirect' in a way that excludes social media. Another trap: the time period. A two-year non-solicit is standard, but if the seller starts a competing business and hires your people in month 23, you're still in court. And some clauses don't cover consultants or contractors — only employees. So the seller hires a consultant who was previously an employee, and the clause doesn't trigger. Luna: So the consultant loophole. That's clever. Lucas: It is. And it's completely enforceable if the clause says 'employee.' The fix is to define 'covered persons' to include all service providers — employees, consultants, independent contractors, even board members. And include a 'look-back' period: anyone who worked for the target in the 12 months before closing is covered, not just current employees. Otherwise, the seller could have someone resign before the deal and then rehire them the day after. Luna: That would be brazen, but it happens? Lucas: I've seen it. In a smaller deal I advised on, the CEO had his brother resign two weeks before closing. The non-solicit only covered 'employees of the company at closing.' The brother was gone. Six weeks after close, the CEO — now at a new company — hired his brother as a 'consultant.' The buyer had no recourse. That cost them about $500,000 in rehiring and training costs for a key salesperson. Luna: You mentioned a 'notice and matching' clause earlier. How does that work in practice? Lucas: Simple. If the seller wants to hire someone covered, they have to send a written notice to the buyer. The buyer then has, say, 10 business days to make a retention offer. If the buyer makes an offer that's at least as good — same salary, same benefits — the seller can't hire that person for another six months. That gives the buyer a chance to keep the person without restricting the seller entirely. It's a compromise that often saves deals. In the $120 million case, if they'd had that clause, the buyer could have counteroffered and likely kept at least three of the four engineers. Luna: And the seller would have had to wait. That might have been enough. Lucas: Exactly. The engineers left because the new company offered a 20 percent raise and equity. If the buyer had matched that, they might have stayed. But the buyer never got the chance — they didn't even know the offers were being made until after the resignations. Luna: One last thing. How do you enforce a non-solicit if it's violated? Injunction or damages? Lucas: Both. The typical remedy is an injunction — court orders the seller to stop soliciting and to return any employees they've already hired. But injunctions are hard to get quickly. You need to show irreparable harm. That's why you also want a liquidated damages clause: a pre-agreed amount per employee poached. Say $500,000 per person. That makes enforcement easier because you don't have to prove actual damages. Courts generally uphold liquidated damages if they're reasonable. In the $120 million case, the buyer had no such clause. They had to prove $30 million in lost revenue — a much harder case. Luna: So the checklist for a buyer: one-way non-solicit, no general-solicitation carve-out, define covered persons broadly, include a look-back, add notice and matching, and put in liquidated damages. Lucas: That's the playbook. And also — get retention agreements signed pre-close. That's the most important thing. The non-solicit is a remedy after the fact. Retention is prevention. If you only have one takeaway from this episode, it's that a piece of paper won't keep your best people. You need to make them want to stay. Luna: And that's the real cost of the trap — it's not just legal fees, it's the talent flight that sinks your growth plan. Lucas: Exactly. $120 million deal, $30 million in lost value, all because of a few lines of boilerplate. M&A is full of these landmines. The non-solicit is one of the sneakiest. Next time you're buying a company, look at that clause like it's the most important page in the agreement — because it just might be.